Generac Holdings Inc (GNRC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q4 and full fiscal 2009 Generac Holdings earnings conference call. My name is Veronica and I will be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Aaron Jagdfeld, CEO. Please proceed.

Thanks, Veronica. Good morning and welcome to Generac's fourth quarter 2009 Conference Call. I want to thank everyone for joining us this morning. With me is York Ragen, our Chief Financial Officer.

I'll begin by stating that we'll make a number of forward-looking statements on our call today. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our SEC filings for a list of words or expressions that identify such statements and the associated Risk Factors.

Now, I'd like to present some of our 2009 full year highlights. In spite of the economic headwinds in 2009 we were extremely proud of our ability to grow the Company during a period where consumer durable spending and non-residential construction declined dramatically. Our results are a testament to our business model and efforts of all of our employees. On a full year basis we grew sales by 2.4%. Net sales in 2009 were $588.2 million compared to $574.2 million in 2008. Our residential power products sales grew 11.5% year-over-year, driven by introductions of new products, increased distribution, and continued marketing efforts to expand awareness of home standby generators. This was partially offset by weakness in our industrial and commercial markets due to reduced capital spending by customers in those markets.

Additionally, we are very pleased with our margin improvements in 2009. Adjusted EBITDA grew 22.5% to $159.1 million for 2009 as compared to $129.9 million in 2008. Adjusted EBITDA as a percent of net sales expanded to 27% for the full year compared to 22.6% in 2008. Adjusted net income was $83.6 million in 2009 compared to adjusted net income of $13.8 million in 2008. Increased sales volume, improvements in gross margin and $37 million in reduced interest expense were the drivers of this significant adjusted net income increase.

I'll now turn the call over to York Ragen who will review our results in more detail. York?

Thanks, Aaron, good morning everybody.

Turning to our fourth quarter results, sales for the quarter totaled $154 million, a 10.8% decrease from the fourth quarter of 2008. Residential power products sales declined $11.9 million or 10.5% to $101.9 million from sales of $113.8 million in 2008. As Aaron previously mentioned, for the full year 2009, we grew our residential product sales by 11.5% year-over-year; a stronger winter season and pre-hurricane season helped to offset the weaker summer season in 2009 compared to 2008. The impact of the weaker summer storm season carried into Q4 2009, driving lower residential sales for the quarter.

Industrial and commercial power product sales declined $7.3 million or 14% to $44.6 million from sales of $51.9 million in 2008 due to lower capital expenditures at our national account customers and weakness in non-residential construction spending. Reductions in industrial commercial markets were partially offset by increases in shipments to our new private label accounts. Gross margins for the quarter were 41.3% compared to 33.7% in the fourth quarter of 2008. Margins improved due to lower material costs for our primary commodity inputs namely steel, copper, and aluminum. As you know, commodity costs increase rapidly to levels in 2008. In 2009 we saw commodities normalize resulting in favorable impact of margins, as the lower cost work through supply chain and inventory.

We also implemented price increases in early 2009 across certain of our residential commercial and industrial products and benefited from cost reductions driven by improved engineering and sourcing of component parts and products. Operating expenses for the fourth quarter of 2009 declined relative to the fourth quarter of 2008. As a reminder, we took a $583.5 million goodwill and trade name impairment charge in the fourth quarter of 2008. Excluding this charge, operating expenses for the quarter declined 1.9% to $34.3 million. This decline was driven by lower variable expenses in connection with our lower sales volumes, partially offset by increased investment in R & D and advertising compared to the prior year quarter to support our ongoing product development and marketing efforts. As a result of these factors, adjusted EBITDA increased 14% to $44.1 million in the fourth quarter of '09 versus $38.7 million in the fourth quarter of '08.

On a margin basis, adjusted EBITDA margin grew to 28.6% in the fourth quarter of '09 versus 22.4% in the prior period. Interest expense declined $17.2 million for the quarter compared to $26.6 million in the prior year quarter driven by the impact of debt repurchases and lower interest rates. I will discuss pro forma interest expense in a moment. Our book income tax expense was nominal for fiscal 2008 and 2009 as we currently do not pay federal income taxes and we apply full valuation allowance against our deferred tax assets. Net income generated during the quarter was $11.9 million compared to a loss of $515.8 million in the prior year. Again, prior year included prior year quarter included a non-cash goodwill and trade name impairment charge of $583.5 million.

In addition, the prior quarter included a $60.1 million gain on extinguishment of debt as a result of debt buybacks contributed for equity during the prior year quarter. Adjusted net income for the quarter was $25.6 million versus adjusted net income of $8.6 million in the prior year quarter. The year-over-year increase in adjusted net income is driven again by higher gross margins and lower interest expense versus the prior year quarter. We continue to generate substantial cash flow as a result of our strong margins, favorable tax attributes, and low capital expenditure requirements.

Our asset light model is highlighted by the fact that CapEx has been less than 1% of net sales over the last two years. In 2009, we generated $70.1 million of cash flow from operations, less CapEx, a level that we believe will increase as a result of our lower debt service costs going forward. Subsequent to December 31, 2009, on February 17, 2010, we completed our initial public offering of 18, 750,000 shares of our common stock at a price of $13 per share. In addition, the underwriters exercised their option and purchased an additional 1, 950, 500 shares of our common stock from us on March 18, 2010, to cover over-allotments. We received a total of approximately $247.8 million in net proceeds from the initial public offering and underwriters exercise after deducting the underwriter discounts and total expenses of the offering.

Our capitalization prior to the IPO consists of Series A preferred stock, Class B common stock and Class A common stock. In connection with the IPO, we affected a corporate reorganization in which, after giving effect to a 3.29 floor for one reverse Class A common stock split, our Class B common stock and Series A preferred stock was converted into Class A common stock and our class A common stock was then reclassified as common stock. Following the IPO, we have only one class of common stock outstanding.

Following the corporate reorganization, the IPO, and underwriters exercise, we have 67, 529, 290 total common shares outstanding. Following the IPO, we used proceeds from the IPO, together with a portion of cash on hand, to make a $360.1 million pre-payment on our term loans. The pre-payment was first used to pay down our second lien term loan in full with the remainder used to pay down a portion of our first lien term loan, including future amortization of principal on the first lien term loan. As a result of these debt pay downs, as of March 19, 2010, the outstanding balance on the first lien credit facility has been reduced to $731.4 million and the second lien term loan has been terminated. In addition, we have no borrowings outstanding under our revolver, which has approximately $145 million of availability net of LCs. This reduction in debt will have a significant favorable impact on cash flow as a result of lower interest expense in future periods, based on current LIBOR rates.

Looking forward to 2010 based on the debt pay downs just discussed and including the impact of our new interest rate swap starting July 2010, we estimate interest expense, excluding amortizative deferred financing costs, will be $25 million to $27 million in fiscal 2010. This assumes our current debt balance, LIBOR of 50 basis points, for the second half of 2010 and reflects only our current interest rate swap contract. We expect capital expenditures to be in the range of $7 million to $9 million in 2010; we also expect to pay less than $1 million of cash income taxes in 2010, all of which are attributable to state income taxes.

With that I'd like to turn the call back over to Aaron to provide some additional comments.

Thanks, York.

Let me close by commenting on what we see heading into 2010. We continue to see demand weakness in our end markets in the short-term, although we believe those trends are moderating as a whole. We remain optimistic about our long term growth potential as we continue to believe in the macro factors, including an aging grid, attractive demographic trends, low market penetration of home standby and like commercial product categories as well as a broader recovery of end markets in the coming years. To capitalize on these macro theme, we remain dedicated to expanding our distribution, driving category awareness, and creating innovative and cost effective products that meet our customers needs.

With regards to our efforts to expand distribution, on a net basis we added several hundred dealers to our distribution network in 2009. We also continue to expand our presence at retail. We added an outdoor power equipment dealer network in connection with our re-entry into portable generators, and we executed two new private label arrangements in 2009. In 2010, we are continuing to add to our dealer count with a particular focus on our underserved markets. We are also focused on expanding newest private label programs, while looking to add additional private label partners to expand distribution reach. Additionally, we are dedicating resources to growing our commercial, national account relationships. We continue to view distribution as a key strength of our Company and an important driver of growth.

With regards to products, 2010 will see the introduction of a re-vamped industrial product line as a result of a previously announced engine supply partnership with Fiat powertrain. We'll also introduce a new entry level price point home standby generator later this year. This product was formerly unveiled at the international builder show in January and was well received by builders and media representatives in attendance at the show. Our efforts in marketing for 2010 will continue to center on expanding awareness of home standby generators, as well as positioning of the Generac brand as a recognized leader in innovation and value across all of our product lines. Our efforts to promote awareness include local market advertising in the wake of significant power outages as well as expanding point of purchase displays with our retail partners.

This concludes our prepared remarks. Thanks again for joining us today, and at this time we would like to open up the call to questions. Operator?

Thank you. (Operator Instructions).

Your first question comes from the line of Steve Sanders from Stephens Incorporated.

Hi, good morning everyone.

Hi, Steve.

First, we obviously had a series of winter storms move through a lot of the country in the March quarter leading to several high profile outages. From your view, were these significant enough to have a meaningful impact on sales over the next few quarters and have you obviously ramped up marketing in some of those key areas to capitalize on that?

Well, Steve, I mean certainly, outages are what drives a good part of our business model, so just as a reminder, what we typically see in an outage is the immediate demand is satisfied through portable generators, and then generally, there's a longer term window of increased demand with our installed products.

I will say that the outages in the northeast, while, I think, impacting probably many of the listeners on the line here, personally, actually those outages were maybe not as significant as people gave credit to in the media. They did drive some volume, you'll certainly see that reflected in our numbers, but I think the longer term increased awareness those outages provide is really what will benefit the category of products going forward.

Okay, thanks and then a follow-up on the margins.

We obviously saw substantial second half gross margin improvement on a relatively modest sales increase, assuming that the majority of that was price realization and more normalized commodities, commodities are moving up now so how should we think about the potential for future price increases or pressure on margins given where commodities are today?

Yes, with regards to commodity levels, I think you will see, on a lag basis, obviously our suppliers are indexed to -- certain suppliers are indexed to commodity levels -- so the numbers that we've pulled together, you will see some impact from quantity levels that we've factored into our numbers. Where commodities are right now isn't dramatically different from what those expectations are, so with regards to price increases, Aaron?

Yes, pricing. Steve, we watch pricing very closely and as York said should we see commodities move aggressively, pricing is one of the levers that we can use to adjust pretty quickly in the marketplace.

I will say that there's pricing just as a broad statement for the year is pretty flat. There's some puts and takes along the product lines, depending on which customers, which channels, which products but by and large we don't see a material impact on pricing. Now, again, that being said, we could certainly use that as a way to recoup any major moves in commodities.

Okay, and then final question. I think, Aaron, you may have referenced this and I missed it, but just generally the environment on the commercial industrial side relative to what you saw over the course of '09, are you seeing stability, are you seeing it improving a bit, deteriorating a bit, how would you characterize the general selling environment in the C&I side?

Yes, the C&I side remains soft, Steve. We've seen it be a very challenging environment, particularly when it comes to CapEx spending for the large customers that we serve, particularly in the telecommunications space, but we do think those trends are moderating.

I wouldn't say that they're getting a lot weaker, they seem to be bottoming out; hopefully, we'll see by the back half of this year, we'll see something, see some of that stuff break loose and pick up.

Okay, thank you very much.

You're welcome.

Thanks, Steve.

Your next question comes from the line of Mike Halloran from Robert W. Baird. Please proceed.

Good morning, gentlemen.

Hi, Mike.

Could you do the same discussion for the residential side? I know you guys talked about the bottoming of trends on the commercial side, but residential likely a little bit better. Could you just talk about the trend line there?

Sure, Mike. The trend line on residential, again challenging environment, especially when talking about big ticket consumer durable items such as the products that we are out there selling. That remains to be challenging. That coupled with residential spending, just residential investment, as well as whether you're talking new construction or just residential investment as a whole, those are, we believe, again very similar to C&I, we believe that they're bottoming.

Those are more early cycle markets for us in terms of hopefully picking up quicker than we'll see the C&I rebound, but at this point, they still remain very challenging. I don't know that the consumer is -- you're looking at 9% to 10% unemployment and some pretty challenging environments for the consumer still that credit availability being still fairly limited in particular when it comes to home equity loans and things of that nature; people's home prices are still under water, a lot of cases and so that presents a very challenging environment. Again we're looking for that to improve here as we move through 2010, but at this point, we think that we're bottoming, but it's still a challenging environment.

Fair enough, and then could you refresh my memory on what a typical sequential build would look like fourth quarter to first quarter on the revenue line?

Yes, the word typical is going to be the hard part because again you get different outage events that impact the seasonality to a degree. I would tell you that I think in normal seasonality, Q4 to Q1, if you've had an aggressive outage season in the prior year, Q3 to Q4, that can sometimes have Q4 remain somewhat elevated. Q1 coming back down depending on the amount of outage events you get in Q1.

I would tell you that I don't know that there's a good typical reference point there other than to say that a lot of that is dependent on the types of events that happen and drive the demand profile.

What I'm driving at is, is there anything that would have happened fourth quarter or first quarter here that you would say would be out of the norm such that you wouldn't see something a little bit more normalized from that fourth quarter to the first quarter?

No, I wouldn't say, I wouldn't characterize anything there as being out of the norm.

Okay, fair enough and then lastly, on the EBITDA margin, a similar question, recognizing that you're going to see seasonal fluctuations in your EBITDA margins, is there anything that's not representative in the fourth quarter to build on for the upcoming year and could you talk about some of those puts and takes? I know you briefly discussed the raw material side but anything on the SG&A side or anything else in there that's going to start ramping up or down one way or another?

I think as we mentioned, we've been investing in R&D and advertising, and we'll continue to do that, so with regards to that, there might be some play there. Other than that, on the Op expense side--

We continue to make investments in product development, marketing, and those. I think we've made our remarks on that.

An example is the IBS show in the first quarter.

Right, the International Builder Show is one example of that, but additional ramp ups in engineering, but nothing too dramatic, Mike. I think that there's obviously some seasonality in our business. You've seen, we do have, there tends to be some mix shift in the product that can impact margins. I think you've probably seen some of that in our results, historically, here.

And then just on the raw material side, how much of a lag is there between when you purchase and when that actually hits your P&L?

Yes, we've said typically four to six months as it takes roughly two to three months to get through the supply chain and then roughly two to three months to get through the inventory levels.

Thanks, guys.

Thanks, Mike.

Your next question comes from the line of Steve Tusa from JPMorgan. Please proceed.

Hi, good morning.

Hi, Steve.

Just a question on the comment on the residential sales for 2009, you said it was driven by new home standby products, portable generators, as well as increased distribution. Is that a third, a third, and a third or could you maybe just give us some color on which is the greater driver of the sales increase for 09?

Yes, Steve, I mean we're not going to break out the detail as it relates to portables and standby and some of the initiatives there, but we can tell you that all of those initiatives had, I would say, a fairly significant impact on the results so I don't know if you want to say a third, a third, a third. I don't have the exact math in front of me, but they did all have a material impact on the increase year-over-year.

Okay, when you look at the comments from the press release on the outlook, you said that there's certain things that will offset the challenging -- continued challenging end markets. And, I don't mean to parse words here, but does offset mean, it's just a lot of high level commentary. Is revenue going to grow this year or are you saying that there are some pluses and minuses and it's too early to tell?

Yes, again, we're not providing guidance for the year. I think it is too early to tell. I think the economy continues to present challenges there on really all of our end markets. My comments on residential, comments on the commercial and industrial, again we hope to see some rebound in those markets. The sooner they rebound, the more likely we are to have growth in the top line, and we do think that we remain very positive in terms of the long term growth potential of the Company in terms of what we're doing; we think we're headed down the right path here but again, I understand some of the frustration around maybe not being able to tell you exactly where we're going to go for 2010. I wish we knew where the economy was headed in a lot of things.

We know we can control what we can control and that's all the things we mentioned in our release in terms of expanding our distribution, expanding awareness, new product introductions, as I mentioned; and again, I think that those new initiatives and then you couple that with maybe some continued demand rebounds from some of the end markets quicker, that could result in a better 2010. If the economic recovery takes longer, if some of those markets do not recover in 2010 that's going to present a more challenging environment for us.

Right. The comment around the attractive EBITDA margins from the previous question, it doesn't sound like there's any major moving parts with regards to gross margin SG&A, so nothing really stands out there; we're really just talking about flattish number there?

No material major changes there.

Okay, and then one last question just a little bit of a detailed question on interest expense. You guys gave the full year number, but you obviously did the IPO mid-Q1. Just to kind of keep everybody on the same page for their quarterly numbers, should we just adjust the interest expense to reflect that mid-first quarter IPO for the first quarter numbers?

Correct. Obviously with the interest rate swaps that we've put in place effective July 1, there will be slightly higher Q4 2010 interest rates, but the numbers that we modeled were just that, just as what you said, Steve.

Okay, perfect. Thanks a lot. Congratulations again on the IPO.

I think one thing to say is from a cash standpoint, we did pay the fourth quarter interest in the first quarter of 2010, so from a cash standpoint, the run rate is higher.

Okay, thanks again.

Thanks, Steve.

(Operator Instructions). Your text question comes from the line of Corey Tobin from William Blair & Company. Please proceed.

Hi, good morning, everyone.

Good morning Corey.

A couple questions if I could. On the dealer network, Aaron, I think you mentioned a focus on increased dealer presence and under-penetrated markets. Can you just expand on this please and is there any way you can quantify the number of markets that you see as underserved right now or what the potential could be in those markets?

Yes, it's a great question, Corey. I'm not going to talk market to market, but I can tell you when we look across our distribution -- and this is, I think it's an interesting point to make in the distribution model here is that you never know where an outage event is going to happen. You can try and say that they are going to be more likely centered around population centers, which is true, they are more likely centered around areas of the country where transmission and distribution infrastructure is older or poorer in terms of condition, and so we want to make sure that those markets we have good distribution in. Typically, those markets are further built out because they experience more outages.

It's when we get a particular area of the country where an outage occurs that hasn't occurred for quite some time or where there is a particular population growth that is outstripping other areas of the country that's putting pressure on that area of the country in terms of the grid. Those are markets that pop-up every day in terms of our efforts and so it really is a moving target. We look to have very good representation in all of the major markets around the country. That is still not the case everywhere.

As far as quantifying what that opportunity would be numerically, I really can't put a number on it because again, the demand curve differs substantially from market to market in terms of the number of outages that have happened, the severity and the frequency around those outages, so it's very difficult to answer that question with any degree of accuracy, Corey.

Okay, understood.

Then just circling back to a question I think a couple of us have alluded to, but taking one more stab at it. I appreciate the long term comments regarding the growth expectations of the Company, but given that we're so far into the quarter, can you give us a little bit of granularity into what you expect to see here into Q1 and maybe you could just if it's easy just give your current take on where it should rank or where it would comp against the fourth quarter of '09 either roughly in line, slightly better, slightly worse, something along those lines.

Corey this is York. Obviously, we can't comment specifically on Q1, 2010, but I guess what we can say is we are seeing similar year-over-year trends as Q4, 2009 with regards to top line growth and bottom line margins; however, we will -- as Aaron mentioned previously, we are seeing sales decline and margin growth both moderating as a whole, so I think with that statement you can tell where Q1 is heading.

Okay, great. Last one if I could, on the new products, in the new residential product that you mentioned that showed very well at the trade show, when do you expect it to hit the shelves? It sounds like the second half of 2010 time frame, if you could confirm that it would be great and is this unit that might replace some sales of higher priced units or is this more added into the total market opportunity?

Sure. Just to confirm the unit will be available in the second half of 2010, some time in Q3

As for the question of whether that unit will be targeted towards or for lack of better term, cannibalized some of our current sales on installed products, that's not the game plan. The game plan with that product is really to test the price elasticity model with installed standby generators; and what we are really after there, Corey, is we're after the person who is out there today shopping for a portable generator. By creating an entry level price point that we feel is more attractive, we believe we can get more people interested the category and trade up as opposed to trade down.

Great. Thanks again.

You bet.

Thanks, Corey.

Your next question comes from the line of Jeff Hammond from Key Capital Markets.

Hi, good morning guys.

Hi, Jeff.

Just one last stab at the forward-looking growth. It seems like if I'm reading you right you think the end market trends are maybe still flat to down, you control what you can control in terms of new dealers, new products. Just as I look at weather, it seems like the winter storm activity would be a plus and if I'm thinking correctly, you've got an easy comp on summer storm activity, so what would you think of as weather at this point as a positive?

Yes, I think that when you think about Q1 -- just I'll make a comment on that. We had some pretty major outages in Q1 of 2009 as well so it was pretty major ice storm in the center part of the US, so that I think is something you've really got to consider in looking at our Q1 results and thinking about that.

As far as weather for the balance of the year, certainly, again, outages drive demand for our products, so the more awareness that we can create through outage events pushes things further along in the penetration curve quicker, and that's what we look to do. It gives us an opportunity to advertise the category kind of free of charge when we get outage events so that's a big plus for the category.

Certainly, outage events drive our portable generators as an initial way to satisfy demand and then create opportunities to take advantage of that increased awareness level for installed products over the trailing period after an event happens, so it's a part of our business model, good or worse, but it is what it is and we think that there are a lot of macro drivers well beyond just typical outage events.

As we said before, the aging grid is something that has been demonstrated that becomes much more susceptible to those not just storms but just every day grid component failures and things of that nature, so I think it's important to point that out. I think it's important to know that weather does have an impact and outages have an impact on this business.

Sure. Then just switching gears, can you talk -- just give us a sense of -- I know you don't disclose these, but how these two new private label opportunities are going relative to your expectations? As you look forward at additional private label opportunities, what are you targeting, specifically? Is it a different channel? Is it your residential, more commercial? Just a little more color there.

Sure. The private label programs -- I think different companies think of private label deals differently, but we like private label opportunities, in particular, when we talk about residential, if done properly and if done, I think with the right partners, you have the opportunity because of the low penetration rates in that category, the low awareness rates in that category, you have the opportunity.

For us that's about extending our distribution reach, and so the two new programs, to answer your question that we put in place last year, we believe are going pretty well. We're happy with those. One of them is much more targeted on the residential side and the other is much more targeted on the commercial industrial side.

We would look again this year to potentially expand into other private label opportunities, where again, we would have opportunities to look at distribution in non-traditional channels, so something outside of the electrical contractor space perhaps. We do have some opportunities in front of us that we like in terms of tapping some new channels that have not historically purchased or sold these types of products.

Okay, great. Then just final housekeeping. York, you gave a share count, I think 67, 500. Is that a fully diluted?

That is not fully diluted, but obviously the options were struck at the IPO price, so they're 4.3 million, I believe, struck at the IPO price.

Okay, thanks guys.

4.3 million of options struck at the IPO price.

Thanks, Jeff.

There are no further questions. I'll now hand the call over to Management for closing remarks.

Okay, well we thank everybody for joining us here on our first earnings call and we look forward to many more. Thank you, again.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.